Analysis: Crude won't give up on $50/bbl

LOS ANGELES, May 5 (UPI) -- Oil markets have not forgotten last month's heady days when crude futures flirted with the $60 per barrel level and experts said signs pointed to the world being near its limit in terms of crude production and refinery capacity.

Wednesday's 63-cent gain on the New York Mercantile Exchange pushed the June-delivery crude contract back above $50 per barrel mark in defiance of strongly bearish inventory statistics showing the United States to be well supplied with both crude and gasoline heading into the summer driving season.

"The truth is, we are balancing on the edge of a knife with gasoline demand," said Phil Flynn, energy analyst for Alaron Trading. "Right now the market believes the worst of the demand pull is over, yet if gasoline demand is actually higher than expected, gasoline will once again go on a rally."

Flynn's prediction summarized a sentiment that has grown to be almost gospel in the world oil market -- that petroleum demand has climbed to the point where OPEC and the rest of the world's suppliers are having difficulty keeping up.

The International Energy Agency wrapped up a ministerial summit in Paris Tuesday with a sober warning the world's entire oil infrastructure needs to be expanded to meet future demand.

"Speculation is a concern in oil markets, but it is not the underlying cause of volatility and high prices," the agency said in a communiqué. "Energy markets require both timely investment and sufficient stocks to absorb unpredicted, yet inevitable surprises."

That school of thought's influence was borne out Wednesday as June crude climbed to $50.13 per barrel. The outlying months remained in a contango of progressively higher prices through the summer, peaking in November at $53.63 per barrel.

Gasoline futures ended Wednesday with June up 0.7 cents at $1.472 per gallon, with the outer months reaching $1.493 per gallon for August.

The rally came despite the weekly inventory statistics from the U.S. Energy Information Administration showing crude supplies up 2.6 million barrels to 327 million barrels, the highest level recorded since March 2002.

Gasoline supplies also increased 2.2 million barrels as imports topped 1 million barrels per day for the fourth consecutive week.

The NYMEX gasoline prices appeared reflective of a flattening of projected gasoline demand to 0.9 percent by the EIA, which took note of some hard price falls on the demand-driven spot market.

"Since April 1, the spot price of WTI (NYMEX crude) has fallen by nearly $8 per barrel, while the average spot price of gasoline has dropped by more than 27 cents per gallon," the EIA said in its weekly look at the U.S. petroleum market.

The EIA said the retail price of a gallon of regular slipped a fraction of a cent to a still-impressive $2.235, more than 39 cents above the same period last year.

"Unless supplies are disrupted... retail gasoline prices are likely to fall during May," the agency said. "While such a decline will be a welcome relief for gasoline consumers, the outlook remains mostly cloudy, as retail prices are still expected to remain well above last summer."

Part of the reason the gasoline market appeared to be cooling off was the re-start of refineries that had been shut down for what the EIA called "extensive" spring maintenance. With those plants coming back on line, more gasoline is added to the nation's inventory, giving the country's gasoline supply an appearance of growing when it actually is just getting back to normal.

The true answer to high prices would be not only more crude production, but more refining capacity to turn it into useful fuels. Since opening up new oil fields and building refineries, pipelines and tankers are no small undertaking, it doesn't appear the fundamentals of the market will change enough in the near term to make any forays by crude below $50 a long-running trend.